China threatens huge dollar selloff

BryanPosted at 9:38 am on August 8, 2007

I’m not an economist, so I’ll put the question to those in our audience who are: Is this threat as bad as the Telegraph is making it sound?

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning – for the first time – that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China’s “nuclear option” in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing’s foreign reserves should be used as a “bargaining chip” in talks with the US.

This part caught my eye:

Simon Derrick, a currency strategist at the Bank of New York Mellon, said the comments were a message to the US Senate as Capitol Hill prepares legislation for the Autumn session.

“The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles,” he said.

And don’t forget that we’re financing civilization’s war on Islamic terrorism pretty much by ourselves, and at great expense. If the Chinese were to make good on the dollar selloff threat and our economy goes into a serious tailspin, that would hinder our ability to wage that war. That may be the purpose of such an economic attack on us: To see us hobbled, then defeated, then as much of a superpower as the French.

So again, I’ll put the question out to experts who happen across this post: How big a worry is this? If it’s as big a worry as it seems, China is evidently prepared to use this moment in time to wage a serious attack on us at a point of serious vulnerability, or at least threaten to do so. Can we counter it, and with what?